Department of Public Enterprises 2012 Strategic Plan and Budget

Meeting report

Department of Public Enterprises (DPE) Strategic plan and budget 2012
Mr Tshediso Matona, Director-General, Department of Public Enterprises, said that the Department of Public Enterprises (DPE or the Department) had a smaller budget in this year, because most transfers to State Owned Companies (SOCs), formerly called State Owned Enterprises, had stopped. The Department was considering increasing the amount for compensation to employees, but this was difficult as National Treasury (NT) had noted constraints particularly in relation to staff costs. He also noted that Eskom was hard pressed to save 10% electricity output to help finish their build programmes, that this entity faced challenges and that it would require to be prioritised during oversight programmes. He also noted that all the SOCs were under pressure, because of the  global economic situation. 

Mr Matona explained that the DPE was established in the early 1990s, as the office that should deal with privatisation. However, in the late 1990s there had been a change away from privatisation, with the emphasis instead shifting towards the development of state owned entities (now called SOCs) as sustainable entities delivering on specific strategic economic mandates. From early 2000 onwards, there was a more formal articulation of a strategic perspective for the SOCs as levers for directing the economy towards higher growth and employment rates, through investment, industrialisation and transformation. He said that the DPE had successfully developed and implemented a shareholder management and governance model (as set out in slide 4 of the presentation).

Mr Matona said that the shareholder (government) had distinct responsibilities as it owned shares and not enterprise assets. These shares gave the shareholder specific rights and powers. These included the power granted to the Shareholder Minister to appoint all directors after Cabinet approval. Executive directors would be appointed upon recommendation from the board. The shareholder also had to approve significant and material transactions, issue the statement of strategic intent and conclude a binding shareholder compact. The shareholder was entitled to access information to monitor and evaluate performance, as it must enforce accountability and take any remedial action where necessary, as also decide upon good practice.

Mr Matona stressed that these responsibilities of the shareholder were distinct from the responsibilities of the board and management (as set out in slide 6 of the presentation). Whilst the DPE shareholder oversight role was well established, there was still much scope for improvement. The DPE would therefore focus on consolidating the shareholder management model, shifting the emphasis to ensure that SOCs would drive investment, growth and employment, and overseeing the strategic financial and operational turnaround of challenged SOCs.

Mr Matona explained the current strategic context. The prioritisation, announced in the State of the Nation Address, of infrastructure expansion to achieve growth and employment creation, would directly impact upon the DPE’s SOCs, especially on Eskom, Transnet and Broadband Infraco, and this in turn would shape the future trajectory of the Department. The Department would face challenges in its capacity to oversee the investment programmes, and the intended impact of industrialisation, job creation, and skills development. South Africa faced significant economic development challenges, such as a relative decline in manufacturing capabilities and output (ongoing since the 1970s), and associated loss of employment. He said that there was a continued overwhelming dependence on commodity exports, leaving South Africa vulnerable to the commodity cycle. There were also racially skewed economic ownership and management structures and income distribution.

Given this context, DPE had revised its Vision, and it now outlined a vision “to drive investment, productivity and transformation in its portfolio of State Owned Companies, their customers and their suppliers to unlock growth, drive industrialisation, create jobs and develop skills”.

Mr Matona presented an overview of the key achievements and budget expenditure against the current year’s strategic plan. DPE’s shareholder oversight role and model had become well established and had continued to be implemented mostly as intended, although there were challenges and there was much still to be achieved. Specific highlights included the appointment of new Minister, Deputy Minister and Director-General in 2010, and the development of a new Vision and mission for the Department. Eskom and Transnet produced five year competitive Supplier Development Plans (SDPs), and the development of next-generation SDP was at an advanced stage. Cross-cutting initiatives included development of a policy for programmatic and transactional procurements, as well as a strategic and business plan for a Centre of Excellence for complex capital procurement. Supported interventions for locomotive fleet procurement were defined.

Mr Matona then presented SOC-specific highlights. In the energy sector, DPE was instrumental in securing Cabinet support for the funding of a support package, amounting to R174 billion in government guarantees, thus bringing the total government support to R350 billion, which would enable Eskom to deliver on its build programme. In the broadband sector, a Construction and Maintenance Agreement and Supplier Contract Agreement for the West African Cable System (WACS) was signed on 8 April 2009. Infraco launched its commercial offering at a price 10% below market levels, in November 2010. In the defence arena, a framework was developed for the resolution of Denel SAAB Aerostructures. A roll-over of guarantees amounting to R1.85 billion was secured as interim support to Denel.

In the mining sector, the Richtersveld community and Alexkor entered into a pooling and sharing joint venture on 7 April 2011 with the Richtersveld mining company, based on a 51% : 49% profit share respectively. In the forestry sector, DPE initiated work on SAFCOL’s future role, which would be discussed with other stakeholders, to ensure enhanced financial and commercial viability, and ensure that SAFCOL played a role in contributing to development, particularly in rural areas. In the transport sector, a Major Competitive Supplier Development Plan (CSDP) contract between Transnet and General Electric (GE) was signed in June 2010. 90 of the 100 locomotives were to be built in South Africa. Transnet received the first two diesel electric locomotives from the GE transaction in February 2011. SAA had approved the Airbus transaction, and took delivery of the first A330-200 aircraft in February 2011.

Mr Matona then turned to a discussion of the expenditure for 2011/2012. The DPE had spent 84.15% of its budget as at 31 January 2012. An amount of R19 million was unspent in relation to compensation of employees, and he explained that this was due to due to vacant posts at middle and senior management levels. It was estimated that there would still be R4.5 million unspent after salaries were paid for February and March. The goods and services expenditure was R58.2 million, and this represented about 76.04 % of the total goods and services budget, if commitments and orders placed, were taken into consideration. This left R22.5 million, but he pointed out that the DPE had projected being able to spend on units and projects, in addition to the normal operational expenditure, bringing this figure down.

Mr Matona noted that the transfer payments had a significant effect on overall expenditure of the DPE, as these comprised 44.4% of the total budget. The transfer payment to Pebble Bed Modular Reactor, of R40 million, was disbursed in May 2011, and the payment to Denel, of R116.2 million, was disbursed in December 2011.

The DPE had made provision, under the economic classification of “transfer to households” for R721 897 for gifts, donations and sponsorships. The Capital Expenditure spending came to R1.8 million, which was 82.05% of the total budget for capital expenditure for the year, or 82.35% if commitments were taken into consideration.

Mr Matona said Government Outcome 6 called for an efficient, competitive and responsive economic infrastructure network. The DPE was focused on achieving all outputs linked to Outcome 6, and these were contained in the Minister’s Service Delivery Agreement. These included improving the delivery and maintenance of infrastructure, monitoring the roll-out of the Transnet and Eskom build programmes, and achieving policy and regulatory clarity in the sector in which the SOCs operated.

Mr Matona then presented the priority areas, per programme, as set out in the Strategic Plan. Programme 1: Administration aimed to achieve continuous performance improvement to ensure delivery of the Department’s strategic goals, and to attract, manage and retain key skills.  Consistent and clear messaging on government’s intent for the SOCs was needed. The appropriate policies, processes, procedures, time-lines and coordination, and management of outcomes based reporting had to be put in place, and managed.  Programme 2: Legal and Governance would provide legal services to the Department, and support the oversight of the SOCs. Effective corporate governance and shareholder management services were needed, on an ongoing basis. It was important to have effective monitoring of corporate governance. Compliance had to be reported quarterly, against the DPE, SOC and Isibuko dashboards.

Programme 3: Portfolio Management and Strategic Partnerships was outlined in slides 26 to 30 of the presentation. The sub-programmes were Energy and Broadband (Eskom, PBMR and Broadband Infraco), Manufacturing (Denel, Alexkor, SAFCOL), Transport (South African Airways (SAA), South African Express (SAX) and Transnet), Economic Impact and Policy Alignment (to bring all SOCs in line with overarching government economic, social and environmental policies), Strategic Partnerships (which aimed to ensure the SOCs’ commercial sustainability and achievement of strategic outcomes).

Mr Matona then tabled the budget for each of the programmes. Over the medium term, expenditure was expected to decrease, from R353.3 million to R223.2 million, at an average annual rate of 14.2%, as a result of a reduction in transfer payments to SOCs. Spending on compensation of employees was expected to increase to R118.1 million over the medium term, at an average annual rate of 5.7%, due to adjustments for improved conditions of service as well as an increase in the Department’s staff complement, and this would also lead to increases on expenditure on goods and services at an average annual rate of 2.8%, to provide support to the larger personnel establishment. In addition, there was provision for payments for financial assets in 2012/13, of R700 million for Denel and R350 million for Alexkor.

Mr Matona presented a summary of transfer payments and payments for financial assets to SOCs (see slide 26 of presentation). The allocations that he had just set out for Denel were intended to re-capitalise Denel Aerostructures in 2012/13, whilst that for Alexkor address liabilities in terms of the deed of settlement and other obligations. These payments were classified as payments for financial assets in the Economic Classification on the Standard Chart of Accounts. R116.3 million was allocated and paid to Denel in 2011/12 in respect of an indemnity claim granted to Denel Aerostructures. R40 million was allocated and paid to the PBMR in 2011/12 to cover statutory requirements for the decommissioning and dismantling of the fuel development laboratory.

Mr Matona indicated that the total staff establishment of the DPE, as at 1 March 2012, was 189, and 171 of these posts were filled. There were 18 vacancies in the Department, with 13 of these in the interview stage, 3 being advertised and 2 to be advertised. The vacancy rate was 9.52%, which was notably lower than the average public sector vacancy rate of 22%. He highlighted employment equity targets.

The DPE had identified its main strategic risks (see slides 40 and 41 of the presentation). The infrastructure investment programme might not be delivering against the desired targets and addressing capacity constraints. DPE was intending to address this by increasing its focus on infrastructure investment research and analysing the impact on the economy, and strengthening the reporting requirements on project progress. Another risk was that DPE must ensure effective and efficient teamwork and delivery on the shared vision, and DPE was therefore reviewing its internal communications strategy, conducting a climate survey, and implementing findings.  

Mr Matona highlighted some challenges facing the Department. Clarity was required on the legislative framework supportive of DPE’s specific shareholder mandate. DPE faced challenges in attracting and retaining appropriate skills, and the capacity constraints among technical staff meant that current resources needed to stretch further. The Department also experienced budgetary constraints. There was a need to strengthen interdepartmental co-ordination and alignment on mandates of SOCs.  The global recession posed another risk. In some areas, the established corporate governance frameworks for shareholder oversight varied from the actual practices that SOCs employed for boardroom disputes between Boards and Management, procurement practices, including those for major capital investments, financial accounting practices and remuneration practices.

Mr Matona said that there were some ways in which this Portfolio Committee could assist the DPE. The DPE required to be given adequate notice so that it could properly prepare for presentations and briefing, and execute its functions and duties. Clear communication and specific requirements for reporting would help the Department to improve its preparation and achieve a common understanding of expectations.

The Committee could also assist the Department in securing additional funding for its operations. Participation of Members in the DPE’s Annual Parliamentary Learning Programme would provide insight into the sector and into relevant issues. This Committee could engage with other committees, where necessary, to help secure conducive policy and regulatory environments for SOCs.

Ms Matsietsi Mokholo, Deputy Director-General: Legal and Governance, DPE, added that the DPE had identified a few intergovernmental issues, and some governance issues in the SOCs, as related to other departments. The Committee should bear this in mind when meeting with other departments.

Mr Chris Forlee, Deputy Director General: Energy and Broadband, DPE, said that the Committee must also bear in mind that the Eskom three-year price determination would take effect again in July 2012, and the DPE would engage again with the Committee on that.

Discussion
The Chairperson wanted to know exactly what those “intergovernmental issues” were, on which the DPE requested there to be engagement. The DPE had to make it clear also exactly why it needed funds in the budget.

Mr Matona said that although there were details available, they were not specifically presented today. The DPE would prepare a separate briefing on the budget.

Mr G Koornhof (ANC) commended the DPE on a good presentation, and on being one of the three best-performing departments.

Ms C September (ANC) wanted to know whether there was yet certainty around SAFCOL.

Mr Matona replied that the Department still had some outstanding policy issues to do with SAFCOL. Previously, a decision had been taken to privatise, but land claims were laid, and there was still debate as to whether to continue with privatisation or whether the company could play a different role.

Mr Dikobo added that SAFCOL also faced challenges in that other private companies provided a similar service, and the regulatory framework around SOCs may prevent it from competing effectively.

Ms G Borman (ANC) noted that she had seen good progress in the DPE since 2009. She asked for an explanation of the R3.5 million that would be added to the compensation of employees.

Mr Matona explained that this was part of the adjusted budget for the funding of new posts in the Department. 

Mr M Sonto (ANC) commented favourably on the comprehensive presentation, and said he was satisfied with the audit results. He asked what policy changes were needed in respect of the SOCs.

Mr Matona replied that these involved both legislation and coordination across departments. For example, in the transport sector, the Department of Transport oversaw the cost of navigation and airport fees for SAA. The DPE needed to align with the policies of other departments, in order to create a coherent structure for SOCs.

Mr K Dikobo (AZAPO) wanted more clarity on whether the Department had received a “clean” or “unqualified” audit; the Auditor-General indicated that these two terms did not necessarily mean the same thing.

Mr Matona replied that he meant “clean audit” as the Department did not receive any emphases of matter.

Mr A Mokoena (ANC) suggested that the Committee could do better oversight if it were to receive the strategic plans for all SOCs. The information in the Annual Report was not adequate for this purpose.

Mr C Gololo (ANC) thanked the Department, but cautioned that the DPE should not be attempting to rest on its laurels in regard to the vacancies, as it still had posts to be filled. He suggested that internal training and promotion should be considered as an option.

Mr E Marais (DA) referred to slide 20, and enquired as to the progress of payment.

Mr Forlee replied that the build programme was milestone-based, which meant that when a set milestone was achieved, payment would be made, and there was not a direct correlation between the percentage completed and the payment made.

Ms N Michael (DA) said that the Committee received regular queries on the PBMR and was getting mixed messages from the Department. She wanted more clarity around this.

Mr Forlee replied that PBMR was currently in care and maintenance, which meant that the winding up process was done.

Mr Gololo asked what “winding up” meant.

Mr Forlee explained that winding up meant that the subsidiary was closed down, but there were still legal issues being handled.
 
Ms September asked how the DPE would fulfil its huge range of functions, particularly given the vacancies.

Mr Matona replied that the DPE intended to create 48 additional posts over the next two years, with 20 of these in the next year. DPE would start by filling the most important posts, and identify other gaps in the process.

Ms Borman questioned reports in the media that stated that the DPE would give SAA a R6 billion “bail-out”.

Ms Raisibe Lepule, Deputy Director General: Transport, DPE, replied that the principle was correct but this was a premature announcement by the media, as discussions were still ongoing. The funds were meant to deal with improvements to the current services, as SAA had to offer products comparable to other airlines.  This money was also intended for fleet replacement. SAA had not grown, but needed to grow, particularly in new markets in Africa, which were key to its future.

Mr Sonto asked about the relationship between the DPE and SOCs and across the SOCs. He asked if there were problems between SAA and SAX.

Ms Lepule replied that the Department was still looking at the relationships with SOCs so could not comment on it at this point. There had been some difficulties between SAA and SAX, because both had tried to access the same market

Mr Gololo said that the transport budget needed to be clarified between DPE and the Department of Transport. He wanted to know how this mandate would be divided.

Ms Lepule replied that the National Development Plan identified transport as a key driver in the economy. The vision for both public and freight transport was outlined. Although the mandate for transport rested with the  Department of Transport, its work was clearly aligned also to work of the DPE.

Ms Michael asked what kind of influence DPE had on a company like Eskom, who was reported to have spent millions of rands on entertainment.

Mr Forlee replied that Eskom was holding a drive towards cost containment, and Eskom itself had to look into the matter.

Mr Koornhof wanted more information on the National Development Plan, saying that this would help in gaining a  clearer perspective on the recommendations on some SOCs.

Mr Matona replied that the National Development plan affirmed state-ownership for some companies. There were certain areas where the state could achieve more than the private sector. However, a balance had to be struck, and it was possible to bring in the private sector in the areas of energy and transport, as outlined in the National Development Plan.

The Chairperson said that the Committee and DPE should reach agreement on the planning of meetings, because adequate notice of meetings was required on both sides

Mr Matona replied that he was aware that there would be instances where the Committee would have to ask for a meeting at short notice, but this should be the exception, rather than the rule.

Ms Borman asked if there was any truth in the rumours that SAA and Transnet may join.

Ms Lepule replied that this was only media speculation.

The Chairperson thanked DPE for the comprehensive presentation. He suggested that more signage was needed at the Department’s offices. Another meeting would be held to hear the motivation for the budget.

The meeting was adjourned.